Monday, April 7, 2008

Financial press starting to recognize the obvious

Central banks must care about house prices

"So what should a central bank do? It should seek to stabilise a broad price index, which should include not only oil and food but also a realistic measure of property prices. By this I do not mean a rental component but some element of the residential property market itself. In the UK, the all-items retail price index is one such measure (since it includes mortgages). I know that broad inflation indices are annoying from a central bank’s perspective. Those indices do not react well to policy action. But the goal of monetary policy surely cannot be to make life easy for central bankers." And who was it that switched the inflation target from RPI to CPI?

Posted by richc @ 09:57 AM (1037 views)
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10 thoughts on “Financial press starting to recognize the obvious

  • mark wadsworth says:

    I’ve said this before (and no doubt I’ll say it many times again) they deliberately excluded house prices from inflation target on the way up because it creates feel good factor and enables Nulab to propound the lie that the economy is stable and growing, but they’ll include house prices on the way down because a) they’re desperately trying to shore up house prices/banks, b) It will make inflation look lower than it really is.

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  • I completely agree.

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  • Switching to CPI as the target for inflation was a calculated ploy by Brown to make the economy look better in the short term, while storing trouble for the future.

    At the time he thought he was about to become PM, could call an election, get elected, and after a full term in office could bow out in glory about now.

    He didn’t reckon on TB hanging on to power for so long, so his master plan has unravelled..

    When the dust finally settles and house prices find their sustainable level, it would be wise to use an inflation target for monetary policy, but include in the inflation basket the Land Registry’s mean house price (with an appropriate weighting)

    The BOE should regard sudden increases in house prices as a cause for concern – but for the last few years they have been prevented from doing so.

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  • waitingfor hpc says:

    but with rising prices in the shops who is going to believe they do not need a pay rise as we switch to RPI ….. i feel riots in the streets getting close if this happens.

    the answer is take the pain, let house prices drop, then shore up the system for future generations!

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  • @1 : Mark – absolutely.

    Wont help them this time though. People will decide their own inflation figure if they are not given guidance that even vaguely matches experience.

    Only thing that will stop house booms and busts on such a signficant level in this country is when everybody realises that a house is just a box, the value of which should rise (appox) in line with inflation and earnings and which costs you a reasonable amount of money to maintain. This is a cultural shift it seems.

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  • “when everybody realises that a house is just a box”

    Indeed – a consumer durable that should depreciate with age.

    I have often thought that when new houses are built that are either terraced, semi’s or flats they should be sold leasehold (maybe 60 years) and NOT freehold.

    When the lease is nearly expired they would provide very affordable homes for the less affluent and when the leases do expire, the site can be re-developed in an orderly efficient manner.

    Instead, we now have thousands of decaying estates in the post-war New Towns that have no easy options for re-development.

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  • The move to CPI was more about being in line with Europe.

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  • also sold to rent says:

    RPI includes mortgage payments, but that says nothing about the size of the mortgage or house prices, so targeting house prices directly still wouldn’t be in the BoE remit. And I don’t think it should. House prices are an asset and asset price targeting is generally avoided by central banks. Yes, they keep an eye on them but to target them directly is folly. What if everyone were investing in tulips, should the bank raise rates as the price of tulips increases? Or tech stocks? Or houses?

    However, I do agree that the narrower the measure of inflation the less useful it is to the man in the street and the more easily controlled it is for the central bank. The Fed’s ‘core inflation’ doesn’t seem to include anything! No food, no energy, just flat screen TVs and sofas. I like jam between two flat screen tvs for breakfast personally.

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  • Hang on, also sold to rent.

    The Bank of England has been targeting asset prices, and most specifically house prices. However they’ve been doing it in an unofficial “we don’t target asset prices” way, as the graphs show here:

    http://www.marketoracle.co.uk/Article3615.html

    Whenever house price inflation has dropped below 9%, the Bank of England has cut interest rates regardless of rising inflation. Combine this with the exclusion of house price inflation from the ahem, preferred inflation measure of the CPI, and the source of the lending boom become all too apparent.

    This is also why the source of the UK credit crunch, and the party to blame for the current crisis is the Bank of England.

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  • Paul – absolutely – borrowed from another post :-

    DEBT AND TAXATION INCREASE

    In case someone suggests that the Government could use all these dictatorial powers for the good of the people, the results belie any such implication. A “liberal credit policy” has certainly been introduced – but, credit is issued as a debt, carrying interest charges. The result has been a drastic increase in taxation and rising prices. This is part of the Finance-Socialist plot. Exponents of this “new order” have often stated that the people must be kept quiet with sops while their liberties and institutions are taken from them. Millions of pounds of debt-money provide the sops. “Taxation is the chief means,” says Britain’s socialist Fabian Society in its Tract No. 127, adding that “to the Socialist, the best of governments is that which spends the most.”

    ERIC D. BUTLER

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